Why Nuance Communications Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Nuance Communications (NASDAQ: NUAN) plunged more than 18% Tuesday after the company reported solid quarterly results, but followed up with disappointing forward guidance.

So what: Adjusted quarterly sales rose to $490.4 million, which translated to adjusted net income of $95.2 million, or $0.30 per diluted share. Analysts, by contrast, were looking for adjusted earnings of just $0.29 per share on sales of $489.56 million.

However, Nuance also stated non-GAAP revenue for its fiscal first quarter 2014 to be between $477 million and $487 million, with non-GAAP earnings per share between $0.18 and $0.21. Analysts were modeling adjusted fiscal first-quarter earnings of $0.33 per share on sales of $494.74 million.

In addition, beginning with this report, Nuance is now including a bookings forecast to help investors more effectively track its transition away from perpetual license purchases and toward term-based and subscription pricing. In fiscal 2014, Nuance expects bookings to increase around 15% to between $2.15 billion and $2.25 billion.

Now what: It may serve as little consolation for shareholders who weathered today's plunge, but I agree with management's assertion this transition should serve to build for Nuance a more predictable, recurring revenue stream over the long-term. As it stands, though, the fickle market certainly doesn't appreciate the resulting near-term weakness.

That said, given today's drop, it looks like much of that pessimism is priced in. With shares now trading under 9 times next year's estimated earnings, I think shares of Nuance could turn out to be a bargain for patient long-term investors.

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Comments from our Foolish Readers

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A company with such largely diversified scores with leader products in varied markets is being sold out? I completely agree this is a bargain stock primed for a rocket ship ride to the top.

Make the knowledgeable move to get in NUAN now before you just ride the coattails after the 'others' (financial managers) think it's climbed enough and is considered 'safe' status. The fact is they have a solid basis more so than other one hit wonder companies, have talent far exceeding the norm and whose embedded customers yield an unlimited potential to play any growing market space. NUANce is the play on the market to watch.

The Forward P/E appears to be around 10.7 according to Yahoo Finance (share price hasn't moved that much since yesterday's close), although I can't quite replicate that using the annual EPS estimate of 1.05-1.15 (midpoint of 1.10 cited on Y Finance)...seems current price of 13.30 implies forward P/E of over 12 (13.30 divided by 1.10). Still cheap, just not as cheap. Hope this finally proves to be a bottom. I would hope that they've now at least given guidance that is achievable.